MLA – Challenges with Share Secured Loans and Statutory Liens
Written by Brandy Bruyere, Director of Regulatory Compliance
As the first MLA compliance deadline quickly approaches, we are frequently asked about the rule's possible impact on statutory liens/rights of offset and share secured loans. While there are not clear answers here, the reason these questions keep coming up is that the rule contains some problematic language:
(e) The creditor uses a check or other method of access to a deposit, savings, or other financial account maintained by the covered borrower, except that, in connection with a consumer credit transaction with an MAPR consistent with 232.4(b), the creditor may:
1) Require an electronic fund transfer to repay a consumer credit transaction, unless otherwise prohibited by law;
(2) Require direct deposit of the consumer's salary as a condition of eligibility for consumer credit, unless otherwise prohibited by law; or
(3) If not otherwise prohibited by applicable law, take a security interest in funds deposited after the extension of credit in an account established in connection with the consumer credit transaction. (Emphasis added)
Let's start with statutory liens or rights of offset. The rule and preamble never squarely address these situations. The prohibition against using an other method of access to a member's deposit or savings account is rather broad, and the preamble does not discuss this language at all. This creates ambiguity as to whether the statutory lien is an other method of access to an account. Unfortunately, the DoD has not provided much guidance on the MLA outside of the Preamble, although we continue to work with them on the need for guidance and hope to see some clarification soon. Arguably, the broad language other method of access is intended to limit certain practices taken by some lenders such as securing a loan through electronic access to a checking account. To date, the DoD has not offered any clarification or guidance as to whether this provision should be construed to limit specific practices, or construed broadly to include even the statutory lien.
What about share secured products? Notice that the MLA permits credit unions to take a security interest in funds, but with certain conditions:
- The funds were deposited after the extension of credit, and
- The account was established in connection with the consumer credit transaction.
Many credit unions have noted that the rule is written in a way that presents workability issues, given the timing related limitations on when the funds are deposited (after credit is extended) and when the account was established (in connection with the loan). Again, the preamble has no discussion of this provision, but the rule seems to contemplate taking a security interest in a separate account set up along with the loan. Meanwhile, violating the MLA comes with stiff penalties, including voiding the contract.
Overall, these two issues may require consultation with your attorney. While pending guidance from the Department of Defense could potentially shed some light on the ambiguities here, it is not clear how long it will take for that guidance to publish and meanwhile, the compliance deadline is only about 6 weeks away.
DoD Military Lending Act Interpretive Guidance Released
This blog was written before DoD issued its interpretative guidance on August 26, 2016. The interpretative guidance does change the analysis in the above blog post. For an update discussion of this question in light of the interpretive guidance, see August 29th's blog post, U.S. Department of Defense Issues Interpretive Guidance on MLA Share Secured Loans and Statutory Liens Revisited. The interpretative guidance can be found in the Federal Register. NAFCU's Regulatory Compliance team will update the association's MLA Compliance Guide in advance of the effective date (October 3, 2016) to account for the new guidance.
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